Insurance terminology can be confusing, but it’s important for you as a policy holder to understand the different terms involved so you can make informed decisions about your policies. For instance, depreciation is one part of insurance that can impact your policy, which is why we are going to explain what it is and why it matters.
What is depreciation?
Depreciation is defined as the amount your home, vehicle, or other personal property has decreased in value since you purchased it. For example, if you bought an appliance for $5000, and used versions of the same product currently sell for $4000, your appliance has depreciated by $1000.
What is recoverable depreciation and how will I get paid?
Recoverable depreciation is the amount you can get back once you make a claim, as long as your policy includes replacement cost coverage for the item in question. Typically, your insurance company will pay you in two parts: the first payment will be the depreciated value of the item; the second payment for the recoverable depreciation will be for the repair or replacement of the item.
Why can’t I receive one payment upfront?
The primary reason insurance companies split the recoverable depreciation payment is to avoid fraud. They want to ensure you are spending the money on repairs and replacements as opposed to on unrelated expenses.
Is there a formula that is used to calculate recoverable depreciation?
There is a formula that insurance companies use, however, it varies depending on your policy and the extent of the product’s damage. The basic method to calculate recoverable depreciation is by deducting the item’s value by a fraction of its useful lifetime.
What is non recoverable depreciation?
Non recoverable depreciation is the amount of depreciation which is ineligible for reimbursement as per your insurance policy. As a result, your insurer will only pay the actual cash value. It’s important to note that even if you have a replacement cost policy, fragile items might not be eligible for full reimbursement. These items might include carpets and awnings.
Keep in mind that payouts may vary depending on the source of damage. For example, if a tree falls on your roof, you might get a payout for replacement cost insurance; if your roof is damaged by a weather-related incident, you could receive the actual cash value only.
Which documents do I need to provide my insurance company with?
After you file a claim and receive your first payment, you will need to arrange for the damaged items or property to be repaired. At this point, it’s important to remember to keep all your receipts to show your insurer as proof that you used the money from the first payment as it was intended to be used. Once all your paperwork has been submitted, your insurance company will reimburse you for the recoverable depreciation.
Your trusted insurance agent will be able to guide you through the different aspects of your insurance policy. For more information, contact Superior Insurance and Auto Tags today!